Six Things You Need To Know About FIXED INDEXED ANNUITIES

As the name implies, FIAs are fixed annuities linked to the performance of a stock market index (often the S&P 500). Because of this stock market exposure, they can sometimes bring conservative investors very nice returns – often, considerably better returns than CDs, bonds, or money market accounts. They really aren’t designed to outperform the stock markets; they are designed to outperform the fixed markets. Note Our US Government is continuing to print money. Ask yourself ultimately what is going to happen to us? Inflation ring a bell! What is going to happen to Fixed Income Investments that one owns? If yields turn around and go back up the value of your Fixed Income Investment goes down.

During the accumulation phase of an FIA, you have the opportunity to benefit from stock market gains while your principal is protected against stock market losses. The annuity contract usually guarantees you a minimum rate of interest on your purchase payments while the annuity is growing; the insurance company involved will credit you with either the minimum return stated in the contract or a return based on the performance of the linked index.

If you are skittish about stock market investment, you can potentially realize the benefits of stock market participation through this comparatively low-risk investment.

Each FIA has a particular participation rate. The participation rate signifies the percentage of the invested assets within the annuity keyed to the linked index.

Let’s say you have an FIA linked to the S&P 500 and the participation rate is 60%. That means 60% of your invested assets are exposed to the index. If the S&P 500 gains 10% across a year, this means your annuity gives you a 6% return for the year (before any fees and administrative charges). Compare that 6% potential return to so many CDs and money market accounts which generate a pittance of interest.

Some FIAs measure an index’s gain on an annual basis, others over the entire term of the annuity. Sometimes there are “ceilings” on just how high a return you can realize. From time to time, participation rates may be reset by the insurance company. Occasionally, a margin or “spread” determines the index-linked interest rate instead of a participation rate. In this case, if your annuity gains 10% and the spread is 2.5%, your credited gain is 7.5%.

Most FIAs give you all the features of a fixed annuity: your earnings are not taxed, and when the distribution phase of your annuity starts, you can receive periodic (usually monthly) income payments. (Sometimes you can take the entire value of your annuity as a lump sum at the end of the contract term. It is your withdrawals that are taxed.) There is often a guaranteed minimum death benefit payable to your beneficiary when you pass away.

If you need to put away more retirement savings NOW, the contribution limits on IRAs and 401(k)s can be frustrating. Would you rather have a retirement account you can only put $5,000 or $6,000 in annually, or an account to which you can contribute as much as you want? FIAs (and other types of annuities) have no contribution ceiling, and there are no IRS-imposed income limits above which you cannot contribute.

Many of these annuity contracts are 6-7 years or longer. If you need to withdraw your money from the annuity in the accumulation phase, there is usually a considerable penalty. Fixed indexed annuities do require a long-term outlook and a long-term commitment.

If you are planning to maintain or improve your quality of life in retirement or know someone who this may apply to, maybe you would like to see how fixed indexed annuities can potentially help you. If that’s the case then pick up the phone and let’s talk about these hybrid annuities today.

Mark S. Gardner may be reached at 214-762-2327

MarkGardner@RetireWellDallas.com

www.retirewelldallas.com